Lender Alert: Commercial Finance Disclosure Legislation In New York State Merits Watching
If passed, proposed New York State Senate Bill S5470 (“the Bill”) would impose a disclosure requirement upon certain New York commercial lenders. This proposal follows a trend exemplified most notably in California, which amended the California Financing Law to require licensed commercial lenders and brokers to issue new disclosures to commercial borrowers in that state, including loans made via an internet platform.
The required disclosures of the Bill approximate those in the loan estimate form issued to home buyers by residential mortgage lenders under the federal Truth in Lending Act. The Bill has several exceptions, leaving much of the commercial lending community unaffected and placing substantial regulatory burdens on a narrow remaining segment.
Which Lenders (and Related Parties) Would Be Affected?
As currently drafted, the Bill would not apply to:
- Financial Institutions. The Bill defines “financial institution” as “(i) a bank, trust company, or industrial loan company doing business under the authority of, or in accordance with, a license, certificate or charter issued by the United States, this state or any other state, district, territory, or commonwealth of the United States that is authorized to transact business in this state; (ii) a federally chartered savings and loan association, federal savings bank or federal credit union that is authorized to transact business in this state; or (iii) a savings and loan association, savings bank or credit union organized under the laws of this or any other state that is authorized to transact business in this state.” Any financial institution meeting this definition is exempt.
- Mortgage Lenders. Any transaction secured by real property (i.e., a mortgage) is exempt, which eliminates another significant portion of secured transactions from the scope of the Bill.
- One-Time, or “Incidental,” Lenders. Any loan made by a lender who lends only once per year or less, or only incidentally to its main line of business, is exempt.
- Supporting Entities. Persons providing technological support to exempt lenders are themselves exempt from compliance.
These exemptions generally narrow the list of affected companies to independent lenders and leasing companies that regularly make loans and lease financing that are not secured by real estate, as well as their agents, brokers, and representatives. The Bill also extends the compliance requirement to any third party that is not itself a lender but “solicits and offers” financing that would otherwise be subject to compliance, which suggests that even third-party loan brokers would be subject to compliance.
What Loans Are Covered?
The Bill further limits its scope to three types of commercial finance: (1) account receivables purchase/future receivables purchase, (2) open-end finance (credit line), and (3) closed-end finance (term loan). “Account” is given its meaning in Section 9-102 of the UCC, which means “a right to payment of a monetary obligation … (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of…” (all emphasis added). The Bill appears to make no distinction between a true lease and a secured transaction in the form of a lease. Any sale, assignment, etc., of an account would be subject to the Bill’s required disclosures. It isn’t clear whether the sale or assignment of receivables from one lender to another would be covered, but the plain text of the Bill does not account for that scenario, which suggests it would.
Proposed Disclosure Requirements
A receivables purchase (separated into “accounts receivable purchase” and “future receivables purchase” and expressly including factoring transactions) is generally defined as a purchase and sale transaction in which the purchaser receives the right to payments “at a specified discount rate.” Under such a transaction, the purchaser would be required to disclose the purchase price, disbursement amount after fees (net proceeds), total amount of the receivables sold (which must equal the disbursement plus total cost), total cost of financing expressed as a dollar cost, estimated APR, factor rate expressed as a decimal, term, payment amounts (actual or estimated, as applicable), prepayment charges (if any), and a general description of the receivables purchased (all emphasis added). Disclosure of the factor rate must include estimates based on various rates of repayment by the underlying obligors, using historical data, if available.
For loans, (defined respectively as “open-end” and “closed-end” finance), the requirements are roughly the same, and roughly analogous to those of the receivables purchase, except to the extent that circumstance prevents a specific disclosure (e.g., the APR on a revolving credit line), in which case the lender is required to make a good faith estimate.
For each of “open-end” and “closed-end” loans, the lender has to disclose to the borrower the loan amount, disbursement amount after fees (net proceeds), total repayment (which must equal the disbursement plus total cost), the total cost of financing (with all unavoidable fees and all avoidable fees [e.g., late fees, non-sufficient funds fees, draw fees, non-use fees]), actual or estimated APR, term, payment amounts and frequency (and estimates, if revolving credit and/or variable rate), prepayment penalties, and collateral description (all emphasis added).
Penalties for Non-Compliance
The penalty for non-compliance with any of the foregoing is a $10,000 fine assessed by the superintendent of the New York State Department of Financial Services, per violation, irrespective of how many borrowers were affected. The superintendent may also impose additional injunctive relief at its discretion.
Despite that commercial enterprises in New York are generally deemed to be sophisticated parties, transacting business on an equal footing, the Bill presumes that the lender is at all times the party with the resources and information necessary to provide the described disclosures. The reality is that, particularly with respect to receivables purchases and factoring transactions, the “borrower” (i.e., the seller) often has more information about the proposed transaction than does the lender. The net effect of the Bill is simply to shift a greater amount of the cost and risk for any covered commercial financing from one party to the other, despite the ready availability of accounting, financial, and legal counsel available to all parties. At the risk of editorializing, this Bill represents a solution in search of a problem.
While the exemptions carve out a huge swath of the commercial lending community right from inception, it might be safe to assume that even exempt lenders are wary of the introduction of disclosure requirements for any commercial transaction. With the door potentially opened by this Bill, it may only be a matter of time before similar requirements are proposed to cover all commercial transactions, without exemption.
As of this writing, the Bill remains in committee, where it was introduced. There is no indication that it has seen any additional attention since it was introduced on May 1, 2019. In the event it is taken up for consideration by the Committee on Banks or subsequently submitted for a vote by the legislature, it will likely face significant opposition from the commercial lending community (a well-funded and outspoken lobby in New York) and undergo substantial revision, if not outright dismantling, as a result.
We will continue to monitor the status of proposed New York State Senate Bill S5470, as well as any other similar proposals coming up for consideration, and provide updates as circumstances warrant.
For the complete text of the Bill, go to https://www.nysenate.gov/legislation/bills/2019/s5470.
 Industrial Loan Companies (or “industrial banks,” as they were known in New York) are no longer a charter option under New York Banking Law but still exist in other jurisdictions.