In late December 2020, New York Governor Andrew Cuomo signed S.B. 5470 into law, which will impose a range of Truth in Lending Act-like disclosure requirements on providers of commercial financing in amounts of $500,000 or less. In signing the legislation, Governor Cuomo noted in the memorandum filed with the bill that he had “secured an agreement with the legislature to make certain technical changes to this bill to better provide clarity and align to existing requirements under federal laws, including the Truth in Lending Act.”1 Therefore, we expect amendments to this legislation in the 2021 legislative session, which could further impact its scope, exemptions and requirements.
Under the new law, which takes effect June 21, 2021, non-exempt “providers” of “commercial financing” must disclose key transaction terms to borrowers and obtain a borrower’s signature prior to consummating a transaction. S.B. 5470 follows in the footsteps of a similar law enacted in California in 2018.2 Both states’ laws impose disclosure requirements on commercial purpose loans similar to those that the federal Truth in Lending Act (“TILA”) and Regulation Z impose on consumer (e.g., personal, family or household purpose) loans. This Legal Update provides an overview of S.B. 5470 and the entities and transactions to which it applies and discusses the legislation’s disclosure and signature requirements, the exemptions provided and how the law will be enforced.
Overview and Applicability
S.B. 5470 requires providers of commercial financing to provide certain disclosures to recipients at the time of extending a specific offer of commercial financing in a format to be prescribed by the New York Department of Financial Services (“DFS”). It will have a significant impact on providers beyond traditional commercial lenders, as it broadly defines “commercial financing” to include the providers, and third-party solicitors, of sales-based financing,3 closed-end commercial financing,4 open-end commercial financing,5 factoring transactions6 and other forms of commercial financing as the DFS may provide by rulemaking. “Recipients” include both individuals and business entities.7 The term “commercial financing” does not cover arrangements where the proceeds are primarily used for personal, family or household purposes.8
Given these provisions, S.B. 5470 will impact a broad range of nonbank and fintech companies offering smaller balance “commercial financing.” Because commercial financing is defined broadly to include purchases of accounts receivable and factoring, S.B. 5470 will require providers of merchant cash advances or traditional factoring arrangements to provide the required disclosures, along with traditional commercial lenders. Marketplace lenders and bank partnership arrangements are specifically within the scope of the legislation, as S.B. 5470 applies broadly to entities that “extend” specific offers of commercial financing or that “solicit and present” specific offers of commercial financing on behalf of a third party.9 Thus, even if the entity that makes a commercial loan or other commercial financing transaction is exempt from S.B. 5470’s requirements, a typical online lending platform would still have to comply. As such, fintech companies operating commercial lending platforms are required to comply with the new law even if they rely on a bank partner arrangement.10
As discussed below, S.B. 5470 exempts commercial mortgage loans. The legislation does not impose any new usury limits or licensing obligations, although New York requires a license to make certain commercial loans of $50,000 or less under its Licensed Lenders Law.11
Disclosure and Signature Requirements
While the disclosures vary slightly depending on the type of commercial financing involved, a provider would generally need to disclose the following information: (i) the total amount of the commercial financing (or maximum amount of available credit) and, if different, the disbursement amount; (ii) the finance charge12; (iii) the annual percentage rate or APR, calculated largely in accordance with TILA and Regulation Z; (iv) the total repayment amount; (v) the term of the financing; (vi) the amounts and frequency of payments; (vii) a description of all other potential fees and charges; (viii) a description of any prepayment charges; and (ix) a description of any collateral requirements or security interests.13 Alternative disclosures for factoring and sales-based lending are provided. Moreover, a provider that requires a recipient to pay off an existing commercial financing commitment to that provider as a condition of renewal must disclose the amount of the new financing that will be applied to prepayment charges or interest under the financing being renewed and the dollar amount by which the new disbursement will be reduced to pay down any unpaid portion of the outstanding balance.14 Providers may disclose additional information but not as part of the disclosures required by S.B. 5470.15 “Rates” and “interest” must be disclosed as annual interest rates or APRs, and finance charges must be stated also as APRs.16 While this type of disclosure is relatively easy for traditional commercial loans, the legislation recognizes that other types of commercial financing, such as factoring and sales-based lending, will require alternative disclosures. This may ultimately limit the ability of small businesses to compare various types of commercial financing.
A commercial financing provider must obtain the recipient’s signature, which may be in electronic format, on all required disclosures before authorizing the recipient to proceed further with its commercial financing transaction application.17
S.B. 5470 exempts certain entities and transactions.18 The exempt entities include financial institutions, which are defined to include state or federally chartered depository institutions.19 Bank holding companies, savings and loan holding companies and their non-bank subsidiaries are not included within the definition of financial institutions. A technology service provider providing software or support services to an exempt entity is exempt so long as the technology service provider has no interest in or agreement to purchase any interest in the commercial financing extended by the exempt entity. Also exempt are lenders regulated under the federal Farm Credit Act and any person or provider who makes no more than five commercial financing transactions in New York in a 12-month period.
Transactions that are exempt from S.B. 5470 include transactions secured by real property, leases as defined in Article 2A of the New York Uniform Commercial Code and individual transactions in an amount over $500,000.
Administration and Enforcement
S.B. 5470 creates a new article within the state’s Financial Services Law rather than amending an existing statute. The law authorizes, but does not require, the DFS to promulgate rules to implement the law, including in connection with the calculation of metrics that must be disclosed to recipients of commercial financing, the formatting of required disclosures to allow for easy comparison of financing options, the defining of terms and the enforcement of the law’s requirements.
The DFS can penalize violations of the provisions of S.B. 5470 by imposing civil penalties not to exceed $2,000 per violation or $10,000 per violation for willful violations. The DFS may also order additional relief, including but not limited to permanent or preliminary injunctions.20 These penalties should be imposed only on the provider that failed to make the required disclosures to the recipient or collect the required signatures, whether it be the person who extended a specific offer of commercial financing or an online lending platform that facilitated the offer. There is no express provision for the impairment of a commercial financing transaction’s enforceability as the result of a violation.
S.B. 5470 takes effect June 21, 2021, at which time non-exempt entities must be in compliance with the law’s disclosure and signature requirements. The DFS will need to issue the required disclosure formats before that time, whether by rulemaking or administrative guidance. Based on the unique issues raised by these disclosure requirements, the likelihood of amendments to the legislation and the length of the New York rulemaking process, the June 21, 2021, effective date could be pushed back.
California and now New York, two of the most important financial regulators in the United States, have intensified regulation of providers of business-purpose financing. It would not be surprising to see additional states follow the lead of these two bellwether states as policy-makers increasingly prioritize protections for small businesses across various types of commercial financing arrangements.
1 Memorandum #65 (Dec. 23, 2020), https://www.sfnet.com/docs/default-source/tsl-tslexpress/tslexpress_ny19rsb05470app.pdf?sfvrsn=7ac96eab_2.
2 Since the enactment, California has undertaken several proposed rulemakings to clarify the law and implement the disclosure requirements. Comments on the most recently proposed rules were due on October 28, 2020, and a public hearing was held on November 9, 2020. See Mayer Brown’s Legal Update https://www.mayerbrown.com/en/perspectives-events/publications/2018/10/tila-for-business-loans-and-purchases-of-receivabl.
3 “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. Sales-based financing 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.” N.Y. Fin. Serv. § 801(j).
4 “Closed-end financing” means “a closed-end extension of credit, secured or unsecured, including equipment financing that does not meet the definition of a lease under section 2-A-103 of the uniform commercial code, the proceeds of which the recipient does not intend to use primarily for personal, family or household purposes. ‘Closed-end financing’ includes financing with an established principal amount and duration.” Id. § 801(d).
5 “Open-end financing” means “an agreement for one or more extensions of open-end credit, secured or unsecured, the proceeds of which the recipient does not intend to use primarily for personal, family or household purposes. ‘Open-end financing’ includes credit extended by a provider under a plan in which: (i) the provider reasonably contemplates repeated transactions; (ii) the provider may impose a finance charge from time to time on an outstanding unpaid balance; and (iii) the amount of credit that may be extended to the recipient during the term of the plan (up to any limit set by the provider) is generally made available to the extent that any outstanding balance is repaid.” Id. § 801(c).
6 “Factoring transaction” means “an accounts receivable purchase transaction that includes an agreement to purchase, transfer, or sell a legally enforceable claim for payment held by a recipient for goods the recipient has supplied or services the recipient has rendered that have been ordered but for which payment has not yet been made.” Id. § 801(a).
7 Id. § 801(i) (defining a “recipient” as a “person”); 801(g) (defining a “person” as “an individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust or unincorporated organization including, but not limited to, a sole proprietorship”).
9 Id. § 801(h) (defining “provider” in relevant part as “a person who extends a specific offer of commercial financing to a recipient. Unless otherwise exempt, ‘provider’ also includes a person who solicits and presents specific offers of commercial financing on behalf of a third party”).
10 S.B. 5470 expressly declines to challenge the “true lender” status of such bank partnership arrangements by stating that, “[f]or the avoidance of doubt, the extension of a specific offer or provision of disclosures for a commercial financing, in and of itself, shall not be construed to mean that a provider is originating, making, funding or providing commercial financing.” Id.
12 “Finance charge” is defined to include all charges included in a finance charge under Regulation Z, in addition to any other charges as determined by the DFS. N.Y. Fin. Serv. § 801(e).
19 “Financial institution” means “any of the following: (i) a bank, trust company, or industrial loan company doing business under the authority of, or in accordance with, a license, certificate or charter issued by the United States, this state or any other state, district, territory, or commonwealth of the United States that is authorized to transact business in this state; (ii) a federally chartered savings and loan association, federal savings bank or federal credit union that is authorized to transact business in this state; or (iii) a savings and loan association, savings bank or credit union organized under the laws of this or any other state that is authorized to transact business in this state.” Id. § 801(f).