On December 23, 2020, Governor Cuomo signed Assembly and Senate Bills which amend the New York Financial Services Law to require disclosure of certain financial information by certain defined “provider(s).” The Governor’s statement conditions approval on further amendments and a bill with amendments is already drafted. The Disclosure Act does not become effective until 180 days after enactment, but the proposed amendments make the law effective on January 1, 2022. (Amendment, Section 3). In the interim, the Disclosure Act requires that the Superintendent of the New York Department of Financial Services implement regulations (Section 811).
The purpose of this alert is to highlight aspects of the Disclosure Act which require further attention and clarification. Hopefully, these aspects will be addressed by input from the financial services industry and by regulations. Several aspects of the Disclosure Act have been addressed in recent announcements from the Secured Finance Network, and this alert is intended to supplement those announcements. Initially, it is important to identify who and what is being regulated.
To Whom Does the Disclosure Act Apply?
The Disclosure Act applies to a “provider” defined as one “who extends a specific offer of commercial financing . . .” (Section 801). A “specific offer” is defined as “specific terms” which are “quoted” for “commercial financing” which must contain specific disclosures of financial terms and conditions depending on the type of “commercial financing” “. . . at the time of extending a specific offer. . .”
To Whom Does the Disclosure Act Not Apply?
The Disclosure Act does not apply to a “financial institution” (i.e. a bank, savings and loan, etc.) and other specified service and licensors (Section 802(a)). The Disclosure Act does not apply to an “individual commercial financing” transaction in an amount in excess of $500,000 (Section 802(g)), but a proposed amendment would increase that amount to $2,500,000. The Disclosure Act does not apply to a transaction “secured by real property.” (Section 802(d)) Other exemptions are listed in Section 802.
To What “Commercial Financing” Transactions Does the Disclosure Act Apply?
The Disclosure Act applies to separately defined “open-end” (Section 805), “closed-end” (Section 804), “sales-based” (Section 803), and “factoring” (Section 806) transactions. It is clear nonetheless, given market conditions, that the motivation for the Disclosure Act included concerns caused by “sales-based” financing transactions which are transactions based upon a “percentage of sales or revenues” generally referred to MCA’s (Merchant Cash Advance).
What Are the Required Disclosures?
The Disclosure Act has lengthy disclosure requirements for each type of “commercial financing” which must be provided in writing “at the time of extending a specific offer” and “. . . according to a formatting prescribed by the superintendent.” The specific requirements include an explanation of the “finance charge,” interest rate calculations based upon an APR, fees, charges, prepayment costs and other particulars. The Disclosure Act requires that the foregoing disclosures be provided separately and independent of other or additional information about the financing that the provider may choose to disclose (Section 810).
What Are the Consequences of Non-Compliance with the Disclosure Act?
The Disclosure Act provides for a civil penalty for non-compliance, including a penalty if “willful” non-compliance. It further provides that the superintendent has equitable relief (Section 812). A proposed amendment would enable the superintendent to seek “restitution” against a provider.
What Are Some Unresolved Issues?
Subject to the issues of whether amendments are enacted, pending input from the financial services industry, and pending drafting of regulations, the following are some initial issues:
- The Secured Finance Network has made a number of suggestions and observations questioning whether the finance related disclosure requirements, including the relevance of “APR,” should properly apply to a commercial finance transaction.
- While the definition of an “open-end” financing transaction suggests that the disclosure requirement would apply to “one or more extensions” of a financing transaction it is not clear as to when and how often the disclosures would be required to be made in a particular transaction, or an amendment or restatement, and/or to what an extent an “individual” transaction because the term “individual” is not defined in the exemption provisions of Section 802.
- Each of the specific “commercial financing” types have separate disclosure requirements, each of which suggest use of a format to be prescribed by the superintendent. It is important that the format be resolved by the industry in advance, particularly given the consequences of noncompliance.
- It is important to clarify the scope of the exemptions including whether the “real property” exemption would disqualify an otherwise “commercial financing” transaction secured by additional collateral such as accounts receivable from the disclosure requirements.
- It is important to clarify how the exemption amount is to be calculated and whether or not the amounts refer to the maximum amount of the credit proposed and not to individual or aggregate advances.
- It is important to clarify the penalties and how the regulations contemplated by Section 811 may expand them to include a private right of action for either damages or equitable relief.
Disclaimer: The above article is not intended to be legal advice. If you have questions or would like to discuss this matter in greater detail, please contact Paul Shur or any member of our Financial Services team.