New York Commercial Finance Disclosure Law – Finance and Banking

On December 23, 2020, then Governor Andrew Cuomo signed into law
NY CLS Fin Serv §§ 801-812 (the “Disclosure
Law”) with the intended purpose of “requiring certain
providers that extend specific terms of commercial financing to a
recipient to disclose certain information about the offer to the
recipient.” Although the law was slated to take effect January
1, 2022, the New York Department of Financial Services
(“DFS”) issued a guidance on December 31, 2021, stating
that the “obligations do not arise until the [DFS] issues
final implementing regulations and those regulations take
effect.” Given the latest regulations proposed by DFS provide
for a compliance date six months after publication of the Notice of
Adoption in the State Register, companies have until at least the
summer of 2022 to comply with the Disclosure Law.

Exceptions

First, it is important to note that the Disclosure Law includes
several notable exceptions particularly relevant to our clients.
Notably, the Disclosure Law does not apply to:

• Financial institutions which are defined as (i) a bank, trust
  company, or industrial loan company doing business under a state or
  federal bank charter; (ii) a federal chartered savings and loan,
  savings bank, or credit union; (iii)a savings and loan, savings
  bank, or credit union organized under state law;




• A person acting in its capacity as a technology service
  provider to exempt entities;




• Lenders regulated under the federal Farm Credit Act;




• Commercial financing transaction secured by real property;




• A lease as defined by UCC 2-A-103;




• Any person who makes no more than five commercial financing
  transactions in New York in a twelve-month period;




• A commercial financing transaction where the recipient is a car
  dealer, and affiliate of a car dealer, or a rental car company, or
  affiliate of a rental car company.

In the event the lender falls into one of the above criteria,
then the Disclosure Law is inapplicable.

Financial Transactions

Assuming the company does not fall into an exempted category,
the Disclosure Law envisages four main types of financial
transactions which require disclosures: Sales-based financing,
Closed-end commercial financing, Open-end commercial financing, and
Factoring transaction. Each one comes with its own individual
disclosure requirements.

Sales-Based Financing

Sales-based financing under the Disclosure Law is defined as 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. This 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.

For Sales-based financing, at the time a provider extends an
offer, the provider must disclose:

• Total amount of the commercial financing, and the disbursement
  amount, if different from the financing amount, after any fees
  deducted or withheld at disbursement;




• The finance charge;




• The APR based on the estimated term of repayment and projected
  periodic payment amounts as defined in the law;




• The total repayment amount (ie disbursement amount plus finance
  charges);




• The estimated term which is the period of time required for the
  periodic payments;




• The payment amounts, based on projected sales volumes. If
  payments are fixed, then payment amounts and frequency, and if
  other than monthly, the amount of the average projected payments
  per month. If payments are variable, a payment schedule or
  description of the method used to calculate the amounts and
  frequency of payments and the amount of average projected payments
  per month;




• A description of al other potential fees and charges not
  included in the finance charge (ie draw fees, late payments fees,
  returned payment fees, etc.);




• If the recipient elects to pay off or refinance: (i) whether
  the recipient would be required to pay any financing charges, and
  if so, disclose the percentage of any unpaid portion of the finance
  charge and maximum dollar amount the recipient could be required to
  pay, and (ii) whether the recipient is required to pay fees not
  already included in the finance charge; and




• A description of collateral requirements or security interests,
  if any.

Closed-End Commercial Financing

Closed-end commercial financing under the Disclosure Law is
defined as 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. This also includes
financing with an established principal amount and duration.

For Closed-end commercial financing, at the time a provider
extends an offer, the provider must disclose:

• The total amount of the commercial financing, and the
  disbursement amount, if different from the financing amount, after
  any fees are deducted;




• The finance charge;




• The APR expressed as a yearly rate inclusive of fees and
  finance charges that cannot be avoided;




• The total repayment amount (i.e. disbursement amount plus
  finance charge);




• The term of the financing;




• The payment amounts: (i) if fixed, then the payment amounts and
  frequency, and if the term is longer than one month, the average
  monthly payment amount; or (ii) if variable, then a full payment
  schedule or a description of the method used to calculate the
  amounts and frequency of payments, and if the term is longer than
  one month, the estimated average monthly payment amount;




• A description of all other potential fees and charges that can
  be avoided by the recipient (i.e. late payment fees, returned
  payment fees, etc.)




• If the recipient pays off or refinances the loan: (i) whether
  the recipient would be required to additional finance charges and
  if so, disclose the percentage of any unpaid portion of the finance
  charge and maximum dollar amount the recipient could be required to
  pay; and




• A Description of the collateral requirements or security
  interest.

Open-End Commercial Financing

Open-end commercial financing under the Disclosure Law is
defined as 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. This also 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.

For Open-end commercial financing, at the time a provider
extends an offer, the provider must disclose:

• The maximum amount of credit available and the amount scheduled
  to be drawn by recipient at the time the offer is extended;




• The finance charge;




• The APR expressed as a yearly rate inclusive of fees and
  finance charges that cannot be avoided;




• The total repayment amount (i.e. draw amount less any fees
  deducted or withheld, plus the finance charge). Total repayment
  amount shall assume a maximum draw amount held for the duration of
  the term;




• The term of the plan or the period over which a draw is
  amortized;




• The payment frequency and amounts based on the assumptions used
  for calculating the APR and if payment frequency is other than
  monthly, the amount of the average projected monthly payments per
  month. If the payment amount is variable, provider is to include a
  payment schedule or description of the method used to calculate the
  amounts and frequency of payments, and the estimated average
  monthly payment amount;




• A description of all other potential fees that can be avoided
  (i.e. draw fees, late payments fees, returned payment fees,
  etc.);




• If the recipient pays off or refinances the loan: (i) whether
  the recipient would be required to additional finance charges and
  if so, disclose the percentage of any unpaid portion of the finance
  charge and maximum dollar amount the recipient could be required to
  pay; and




• A description of the collateral requirements or security
  interests.

Factoring Transaction

A Factoring transaction under the Disclosure Law is defined as
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.

For Factoring transactions, at the time a provider extends an
offer, the provide must disclose:

• The amount of the receivables purchase price paid to the
  recipient and, if different from the purchase price, the amount
  disbursed to the recipient after fees are deducted;




• The finance charge;




• The APR calculated as a “single advance, single payment
  transaction” and pursuant to the terms of the statute;




• The total payment amount (i.e. purchase amount plus finance
  charge);




• A description of all other potential fees and charges that can
  be avoided by the recipient; and




• A description of the receivables purchased and any additional
  collateral requirements or security interests.

Other Forms of Financing

Although the Disclosure Law contemplates the above four types of
transactions, it also includes a section which permits the
superintendent of the DFS, in his or her discretion, to require
disclosure by a provider offering commercial financing which does
not fall into one of the above four categories.

In the event the superintendent requires disclosure for such
other transactions, the provider must disclose at the time an offer
is made:

• The total amount of the financing and disbursement amount if
  different from the financing amount;




• The finance charge;




• The APR;




• The total repayment amount (i.e. disbursement amount plus
  finance charge);




• The term of the financing;




• The payment amounts: (i) for fixed payments, the payment
  amounts and frequency along with the average monthly payment
  amount; or (ii) for variable payments, a payment schedule or
  description of the methods used to calculate the amounts and
  frequency of payments along with an estimated average monthly
  payment amount;




• A description of all other fees that can be avoided (i.e. late
  payments fees and returned payment fees);




• In the event of a payoff or refinance: (i) whether the
  recipient would be required to pay any additional finance charges
  and if so, disclosure of the percentage of any unpaid portion of
  the finance charge and maximum dollar amount the recipient could be
  required to pay; and (ii) whether the recipient would be required
  to pay additional fees not already included in the finance charge;
  and




• A description of collateral requirements or security
  interest.

Refinancing

If a provider is considering a transaction which requires the
recipient to pay off an existing commercial financing from the same
provider, then the provider must disclose:

• The amount of the new financing that is used to pay off the
  existing financing. For deals involving a fixed repayment amount,
  the prepayment charge equals the original finance charge multiplied
  by the amount of the renewal used to pay off existing financing as
  a percentage of the total repayment amount, minus any portion of
  the total repayment amount forgiven by the provider at the time of
  prepayment. If this amount is more than zero, this amount will be
  the answer to:
  

  • “Does the renewal financing include any amount that is
    used to pay unpaid finance charge or fees, also known as double
    dipping? Yes, enter amount. If the amount is zero, the answer
    would be No.”;




• If the disbursement amount is to be reduced to pay an
  outstanding balance, then the actual dollar amount by which the
  disbursement will be reduced.

Signature Requirements

Providers are required to obtain recipients signatures (which
can be electronic) on all disclosures before authorizing the
proceeding of a loan application.

Penalties

Upon a finding by the superintendent of DFS of a violation of
the Disclosure Law, the offending company will be penalized Two
Thousand ($2,000) Dollars for each violation or Ten Thousand
($10,000) Dollars for each violation in the even the violation was
“willful”. If the superintendent of DFS finds a provider
knowingly violation of the Disclosure Law, it can also impose
restitution payments or a permanent or preliminary injunction on
behalf of a recipient affected by the violation.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.