The New York Department of Financial Services (NYDFS) has issued “pre-proposed” rules under New York’s commercial financing disclosure law that was enacted at the end of 2020. The pre-proposed rules are 45 pages in length and were posted on the NYDFS website on September 21. Comments on the pre-proposed outreach rules are due by October 1. There will be a longer comment period once a proposed rule is published in the State Register. The NYDFS is aiming to finalize the rules before the law takes effect on January 1, 2022.
The pre-proposed rules give the state’s commercial financing disclosure law, colloquially known as the “NY TILA,” the formal name of the “Commercial Finance Disclosure Law (CFDL).” The pre-proposed rules also define terms, and provide detailed requirements for the content and formatting of the disclosures required under the CFDL. The rules’ defined terms borrow heavily from, but do not exactly mirror, the definitions under the California Department of Financial Protection and Innovation’s (DPFI) proposed rules to implement its own commercial financing disclosure law. The lack of uniformity between the two states’ regulations will complicate compliance for commercial financers subject to both laws. Where the NYDFS rules borrow most substantially from the California rules, the NYDFS tends to draw from the prior version of the California rules before the DFPI’s second round of modifications issued August 9, 2021. This raises the question of whether the NYDFS will incorporate California’s latest modifications when the NYDFS issues the next version of its proposed rules.
Like California’s pending rules, the New York rules envision disclosures being presented in three columns, one each for (1) the name of the term being disclosed, (2) the value (amount, rate, etc.) of the term being disclosed, and (3) a description of the term in specific language prescribed by the rules. The content of several of the required disclosures varies depending on the type of contract, e.g. fixed-rate or variable-rate, which means that financers will have to develop multiple forms or a single form with multiple options to be selected at the time of use—within each category of financing (e.g., closed-end, open-end, sales-based, etc.). Like the California rules, the New York rules go so far as to impose requirements on font and column width, including the provision of a 3:3:7 “safe harbor” ratio for the latter. The information that must be disclosed in each row of the disclosure form under the New York pre-proposed rules does not exactly align with the information required under the statute, such that a financer that has begun drafting disclosure templates based on the text of the statute will need to revise them in accordance with the rules.
Conspicuously absent from the NYDFS’s proposed rules are safe harbor model forms to ease the compliance burden for industry. Because the NYDFS (like the DFPI for that matter) has not issued model forms along the lines of Regulation Z’s Appendix H, each commercial financer will have to independently formulate its own forms and hope the NYDFS finds them compliant. Also absent is a clarification of the New York nexus with the recipient of the financing required to trigger the CFDL, which industry participants and trade groups have requested. While the DFPI has proposed helpful language clarifying that a financing is subject to the California law only when the recipient’s business is “principally directed or managed from California,” (and allowing the financer to rely on the recipient’s business address or written representation), the NYDFS pre-proposed rules offer no further guidance.
In addition to disclosure content and formatting, the pre-proposed rules clarify the NYDFS’s expectations around allowed tolerances for disclosed APRs; recipient electronic signatures; calculation of the $2.5 million threshold to determine whether financing is subject to the CFDL; additional assumptions for factoring transactions; duties of commercial financers and brokers when a broker is used; annual reporting requirements for a financer that has utilized the “opt-in method” of calculating estimated APR; and other requirements. If adopted, the rules will be codified in a new Part 600 of the NDYFS’s regulations.
While the pre-proposed rules are a step in the right direction, further guidance is needed in the near future if the industry is expected to comply with the CFDL’s requirements by the January 1, 2022 effective date.