On December 23, 2020, Governor Cuomo signed into law Senate Bill S5470B (the “Disclosure Law”), which requires lenders to disclose the true costs and fees of commercial financing transactions. S5470B notes that federal laws like the Truth in Lending Act, which requires creditors to disclose the cost of borrowing in a standard format, do not apply to commercial financing. This has led to overcharging and predatory lending practices that hurt small businesses. As such, the Disclosure Law requires providers to disclose key terms and information, including the cost of financing, to allow borrowers to understand financing terms and compare costs among providers. Numerous industry groups have criticized the law and raised significant concerns about some of its provisions. Governor Cuomo recognized these concerns but ultimately signed the bill into law. Below is a summary of its key provisions.
The Disclosure Law applies to commercial financing providers. “Commercial financing” refers to open-end financing, closed-end financing, sales-based financing, factoring transactions, or other forms of financing the proceeds of which the recipient does not intend to use for personal, family, or household purposes. However, the disclosure requirements summarized below do not apply to:
- financial institutions (i.e. banks, trust companies, industrial loan companies, savings and loan associations, savings banks, or credit unions authorized to transact business in New York);
- persons providing technology services to an exempt entity as part of the entity's commercial financing program, provided such person has no interest or agreement to purchase any interest in the commercial financing extended by the entity;
- a lender regulated under the federal Farm Credit Act;
- a commercial financing transaction secured by real property;
- a lease as defined in the Uniform Commercial Code section 2-A-103;
- any person or provider who makes only five or fewer commercial financing transactions in New York in a 12-month period;
- an individual commercial financing transaction for over $500,000.
The Disclosure Law describes four types of financing transactions: sales-based; closed-end commercial; open-end commercial; and factoring transactions. Specific disclosure requirements apply to each of these four types of transactions, but providers in all four transaction types must generally provide the following disclosures to a financing recipient at the time of extending a specific offer for financing:
- the total amount of financing and disbursement amounts;
- the finance charge;
- an annual percentage rate (or, in the case of sales-based or factoring transactions, estimated annual percentage rates) calculated in accordance with the federal Truth in Lending Act. Generally, the disclosures must use the term “annual percentage rate” or “APR”;
- the total payment or repayment amount;
- the term of the financing;
- the payment schedule or payment frequency and amounts;
- a description of all potential fees and charges that can be avoided by the borrower;
- details of finance charges and additional fees if the borrower elects to pay off or refinance the commercial financing prior to full repayment; and
- a description of the collateral or security requirements.
Similar disclosure requirements apply to transactions that fall within the definition of “commercial financing” but are not one of the four specified types. Further disclosures are required for renewal financing: if, as a condition of obtaining the commercial financing, a provider requires the recipient to pay off the balance of an existing commercial financing from the same provider, the provider must disclose:
- The amount of the new commercial financing that is used to pay off existing prepayment charges and any unpaid interest expense not forgiven at the time of renewal.
- If the disbursement amount is reduced to pay down any unpaid portion of the outstanding balance, the actual dollar amount of that reduction.
- The provider must obtain the recipient's signature (or electronic signature) on all required disclosures before authorizing the recipient to proceed with a commercial financing application.
- Providers may provide borrowers with additional information but may not include that information as part of the required disclosures. Providers may also include other metrics of financing cost but may not present those metrics as a “rate” if they are not the annual interest rate or APR. Furthermore, the term “interest,” when used to describe a percentage rate, may only be used to describe annualized percentage rates. And, when a provider states a rate of finance charge or financing amount, the provider must also state the rate as an annual percentage rate.
- The superintendent may require providers to pay a civil penalty of up to $2,000 for each violation of the Disclosure Law or $10,000 for each willful violation. The superintendent may provide further relief for knowing violations, including injunctions, on behalf of affected borrowers.
The Disclosure Law will become effective June 21, 2021. Lenders should ensure that they have disclosure policies in place to comply with the law and avoid penalties for violations. The Banking & Financial Services team at Michael Best can assist lenders in preparing for the Disclosure Law. Please do not hesitate to contact a member of our team for additional information.