On October 20, the New York Department of Financial Services (NYDFS) published a notice in the New York State Register announcing that it has issued a proposed regulation to implement S 5470-B, which requires disclosures for commercial financing transactions of $2.5 million or less under a commercial financing agreement.
The notice allows for public comment for 60 days. The bill becomes effective on January 1, 2022, but compliance with the rule will not be mandated until six months after final publication.
The regulation seeks to parallel Truth in Lending Act (TILA) disclosures for small business financings, so business owners are provided with “the necessary information to make an informed, financially responsible decision. Standardized disclosures will also allow borrowers to compare the pricing and costs of a commercial financing among several providers.” The statute specifies four types of financings affected — sales-based, closed-end, open-end, and factoring — along with the disclosures required for each.
Notably, the definition of “sales-based financing” under the bill captures the practices of many merchant cash advance providers. Indeed, “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 term also includes “a true-up mechanism where the financing is repaid as a fixed payment but provides for a reconciliation process that adjusts the payment to an amount that is a percentage of sales or revenue.”
The statute expressly exempts: (1) financial institutions, (2) lenders regulated under the Farm Credit Act, (3) commercial financing secured by real property, (4) technology service providers that only provide software and support services, (5) lenders who make no more than five applicable transactions in New York in a 12-month period, (6) individual financings exceeding $2.5 million, and (7) automobile financings.
Our Take. While this regulation should not impose a heavy burden on most companies, it will take time to create the appropriate disclosures and train staff. While New York has joined California in enacting legislation requiring consumer-like disclosures for commercial financing transactions, we do not expect to see a widespread enactment of similar state laws.