On December 23, 2020, New York Governor Andrew Cuomo signed into law Senate Bill S5470B (Small Business Truth in Lending Law), which imposes new requirements on certain providers of commercial financing. Aimed at protecting small business owners, the Small Business Truth in Lending Law requires key financial terms such as the amount financed, fees and annual percentage rate (APR) to be disclosed at the time a credit provider or broker makes an offer of financing of $500,000 or less. New York is now the second state after California to require Truth in Lending-type disclosures for small business loans by online and other non-bank lenders.
Who is subject to the disclosure requirements?
The new law is sweeping. It applies to any “provider” of “commercial financing.” The term “provider” is broadly defined to include “any person who extends a specific offer of commercial financing” to a small business. “Commercial financing” is also broadly defined to include loans, factoring, future receivable purchases or any “other form of financing” that is intended to be used for a commercial purpose. Thus, factors, merchant cash advance (MCA) companies and other non-traditional financiers will likely be subject to the new disclosure requirements.
There are numerous exemptions, including banks, trust companies, industrial loan companies and incidental lenders making five or fewer commercial financing transactions in New York in a year. However, this does not necessarily mean that transactions involving banks are exempt from the disclosure requirements of the new law. A non-bank that enters into an agreement with a bank to arrange for the extension of commercial financing via an online lending platform would still be subject to the new law.
Importantly, the law does not apply to individual commercial finance transactions over $500,000 or to transactions secured by real property such as mortgage loans, but on January 6, 2021, legislation was proposed to expand its application to transactions up to $2 million.
What disclosures are required?
The law categorizes commercial financing into five types of transactions: (i) sales-based financing (future receivable purchase financing); (ii) closed-end financing (term loan); (iii) open-end financing (credit line); (iv) factoring; and (v) other forms of financing. While each type of transaction has specific disclosure requirements (see chart below), the law requires all providers to disclose finances charges, fees and, most importantly, the actual or estimated APR:
How will the disclosure requirements be implemented and enforced?
The law authorizes the Superintendent of the New York State Department of Financial Services (NYDFS) to promulgate rules and regulations necessary to effectively administer the law. Those regulations include, among other things, rules regarding calculation of the required disclosures, the formatting of the disclosures and defining terms used in the law. In other words, much is yet to be determined about how the new disclosure law will be implemented and enforced.
The law does not provide for a private right of action, but it authorizes the NYDFS to impose penalties for violations which may include civil penalties of up to $2,000 for each violation or up to $10,000 for each willful violation, as well as injunctive relief on behalf of any recipient affected by the violation.
What effect will the disclosure requirements have on small business financing?
Since 2008, alternative financing for small businesses has grown rapidly and, today, by some estimates, exceeds $19 billion annually. Except for a hodgepodge collection of state usury laws and inconsistent enforcement of those laws by the courts, the industry has operated without regulatory scrutiny. Suddenly, that has changed. The Securities and Exchange Commission has sued one company, Par Funding, for misleading investors about the nature of its products, the New York Attorney General has sued another company, RCG Advance, for allegedly misrepresenting the terms of its transactions to merchants and the Federal Trade Commission has instituted similar suits against RCG Advance and Yellowstone Capital. New York’s new disclosure law represents the latest in a growing trend to regulate the world of small-business financing.
The law is intended to make it easier for small business owners to understand and compare different types of financing by requiring disclosures in similar terms. While well intended, it may be difficult for certain lenders to comply with the new law or for the NYDFS to even develop rules to effectively administer the law. For example, it may be difficult to calculate the APR for financing that has frequent and variable payments or remittances such as traditional factoring.
The new law will undoubtedly increase the cost of financing for small businesses and create difficulties for factors, MCA companies and other alternative financing companies in calculating the APR and determining other disclosure requirements such as the term of the commercial financing or breaking out the financing costs. Whether it has the desired effect of protecting small businesses remains to be seen.
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