As the regulatory scrutiny facing commercial finance providers continues to increase, many have been closely monitoring developments in state-level disclosure requirements. The New York Commercial Finance Disclosure Law (CFDL), which was originally enacted in 2020, stands out as the most comprehensive commercial disclosure law to date. And with the release of the final regulations on February 1, providers have until August 1, 2023, to come into compliance.
Generally, New York’s regulations (like California’s) require that commercial finance companies provide standardized disclosures to their customers regarding financing terms, fees, and other aspects of their transactions — the specific requirements vary based on the type of financing product offered. But while New York’s regulations are similar to California’s in many ways, they are significantly more comprehensive. While this has caused some apprehension within the industry, it is important to note that New York’s final regulations also include key differences from California’s regulations and prior drafts of the CFDL, offering some potential benefits to commercial finance companies.
Here are the key differences:
- Transactions of $2.5 million or less are covered. The CFDL covers commercial financing transactions of $2.5 million or less, which is significantly broader than California’s $500,000 threshold.
- Financial institutions and their majority-owned subsidiaries are exempt. Financial institutions are exempt from the CFDL. New York’s final regulations expand the definition of “financial institution” to include any entity that is majority owned, directly or indirectly, by a financial institution. This is a significant difference from California’s regulations, as well as the last draft of New York’s regulations.
- New York providers are exempt if recipients are out-of-state. The final regulations significantly limit the CFDL’s scope. Previously, the proposed rules provided that a transaction would be subject to the CFDL if either the recipient or provider was primarily directed or managed from New York. The final rules now limit the CFDL’s applicability to transactions where the recipient is primarily directed or managed from New York or, if the recipient is a natural person, is a legal resident of New York.
- Avoidable fees and costs are not included in finance charges. The final regulations provide that the finance charge on a transaction should be calculated to exclude avoidable fees and charges that are not imposed as a condition of the financing.
- Aspects of broker compensation must be disclosed in writing. If a broker is involved in the transaction, the provider must inform the recipient in writing how and by whom the broker will be compensated in the transaction.
There are additional, smaller modifications that providers and brokers should not overlook as they work towards compliance.
Under the CFDL, any instance of noncompliance could result in a civil penalty of up to $10,000 for each willful violation, and up to $2,500 for each other violation. This means that even a single instance of noncompliance can result in significant fines. However, the impact of noncompliance can be even greater for providers that engage in numerous transactions using the same forms or procedures. For instance, if a provider uses a form disclosure that is found to be noncompliant, then all transactions using that form are noncompliant as well. As a result, the penalties for noncompliance can aggregate quickly and become substantial, particularly for non-bank lenders with a large portfolio of transactions. Investing in compliance from the outset can protect against the harsh penalties and potential financial losses that come with noncompliance.
As with California’s regulation, we cannot stress too much the importance of preparing for the new disclosure regime as soon as possible. This is especially true if you are an alternative finance company offering products such as factoring agreements and merchant cash advance. This is because the disclosure requirements become doubly complicated when applied to these non-credit products, and you will need to spend time thinking about compliance, as well as about working with your brokers and employees on compliance and setting proper customer expectations.