As expected, New York has broadened the reach of its new commercial financing disclosure law less than two months after its enactment. S.B. 5470, as previously reported by Mayer Brown, imposed a range of Truth in Lending-like disclosure requirements on a variety of commercial financing transactions. On February 16, 2021, New York Governor Andrew Cuomo signed S.B. 898 into law, clarifying and broadening the effect of the previous legislation. This Legal Update briefly discusses the changes that commercial financers should note.1
More Commercial Financing Transactions Covered
Before this amendment, New York’s commercial financing law applied to commercial financing transactions, broadly defined, in amounts of $500,000 or less.2 As amended by S.B. 898, the law now applies to transactions of $2.5 million or less, effectively bringing a much larger universe of transactions within the scope of the law’s regulation.3 The new $2.5 million threshold may be based on New York’s criminal usury law, which caps annual interest at 25% for loans of less than $2.5 million and thus covers generally the same nexus of transactions that are covered by the amended commercial financing law.4 However, the two thresholds are not perfectly aligned—a transaction in the exact amount of $2.5 million is subject to the commercial financing law but not to New York’s criminal usury ceiling. Regardless, the main takeaway of this change is that a greater number of commercial financing transactions will now be subject to New York’s commercial financing disclosure requirements.
New Exemption for Certain Transactions Involving Auto Dealers and Rental Companies
S.B. 898 amends the commercial financing law so that it does not apply to a commercial financing transaction in which the recipient of the financing is an automobile dealer, vehicle rental company, or affiliate of either, and the transaction is in an amount of $50,000 or more.5 This would generally exclude certain floor plan financing and other credit facilities extended to automobile dealers.
Clarification Regarding APR Calculation
The commercial financing law requires the annual percentage rate (APR) on subject transactions to be calculated according to the federal Truth in Lending Act (TILA) and Regulation Z.6 S.B. 898 adds language clarifying that this calculation method is required regardless of whether TILA or Regulation Z would require such calculation for the transaction at issue. This change is likely meant to preempt arguments that TILA does not apply to commercial-purpose financing and thus the APR on commercial financing transactions need not be computed pursuant to TILA, thus providing an “out” for commercial financers.
No Get Out of Jail Free Card
S.B. 898 enacts new language clarifying that the commercial financing law does not render any illegal transactions legal and that making the required disclosures does not exempt a company from applicable licensing or usury laws.7 The bill also adds restitution to the NYDFS’s arsenal of remedies for violations of the law.
New Effective Date
As amended by S.B. 898, New York’s commercial financing law will not take effect until January 1, 2022, instead of the original effective date of June 21, 2021. We expect that regulations will be required to implement the requirements of this law.
Connecticut Following Suit?
Other states are already following the lead of California and New York, as the Connecticut legislature introduced its own commercial financing disclosure bill (CT S.B. 745) at the end of January.
1 For a more detailed discussion of the entire New York commercial financing law, please refer to our prior Legal Update.
4 N.Y. Gen. Oblig. Law § 5-501(6)(b) (“No law regulating the maximum rate of interest which may be charged, taken or received, including section 190.40 and section 190.42 of the penal law, shall apply to any loan or forbearance in the amount of two million five hundred thousand dollars or more.”).
7 N.Y. S.B. 898 § 2 (N.Y. 2021) (“Nothing in this act shall authorize transactions in this state which are otherwise illegal or allow an entity or individual to operate in this state without a license where a license would otherwise be required.”).